November 30, 2021
One variation of a commonly asked question about FHA home loans is, “Do I have to make a down payment on an FHA mortgage?”
This question gets asked sometimes in reference to other government-backed loans that feature no down payment (available via a Department of Veterans Affairs program offered to qualifying military members and certain military spouses only).
FHA home loans do require money down-the borrower’s minimum required investment is 3.5% of the adjusted value of the home. But the borrower does not always have to pay that money out of pocket.
State and local down payment assistance programs can help–a borrower using a state or local program that meets FHA standards for third-party down payment help could save thousands upfront on the loan.
What kind of standards are required by the FHA? The seller cannot provide any down payment funds, any down payment “gift” or “grant’ must be a true gift/grant that does not require repayment. In other words, you can’t disguise a loan as a grant as part of the assistance program.
FHA loans require specific information about the sourcing of down payment funds and the grant or gift must meet those sourcing requirements
There are situations where more money down than the FHA loan minimum of 3.5% may be required.
Credit Score Issues
Potential FHA borrowers who have credit scores outside the standard required scores (580 or higher for the FHA program minimums, though lender requirements may be higher) will be required to put more money down. This applies to borrowers who have credit scores between 500 and 579 according to HUD 4000.1.
However, your participating FHA lender may have higher credit score requirements, and these requirements will vary from lender to lender.
Identity of Interest Transactions
The FHA loan handbook defines “identity of interest” situations as ” a sale between parties with an existing Business Relationship or between Family Members.” The FHA adds, “Business Relationship refers to an association between individuals or companies entered into for commercial purposes”.
In identity of interest transactions, the down payment required would be 15% of the adjusted value of the property.
HUD 4000.1 does make some exceptions for this, including (but not limited to) the following:
“The 85 percent LTV restriction may be exceeded if a Borrower purchases as their Principal Residence:
-the Principal Residence of another Family Member; or
-a Property owned by another Family Member in which the Borrower has been a tenant for at least six months immediately predating the sales contract. A lease or other written evidence to verify occupancy is required.”
Corporate transfer, tenant purchases and other circumstances may also qualify for exceptions-ask your loan officer for clarification in your specific situation.
Non-Occupying Borrower Transactions
HUD 4000.1 states that a loan where one or more borrowers will not occupy the home as the principal residence may require a higher down payment. Circumstances where this applies include (but may not be limited to) the following as described on page 160:
“A Non-Occupying Borrower Transaction refers to a transaction involving two or more Borrowers in which one or more of the Borrower(s) will not occupy the Property as their Principal Residence…For Non-Occupying Borrower Transactions, the maximum LTV is 75 percent. The LTV can be increased to a maximum of 96.5 percent if the Borrowers are Family Members, provided the transaction does not involve:
-a Family Member selling to a Family Member who will be a non-occupying co-Borrower; or
-a transaction on a two- to four-unit Property”
Lender standards, state law, and other variables may apply. Ask a loan officer about when higher down payments may apply based on your specific transaction.